What Quadriga investors have to think about for tax time

What Quadriga investors have to think about for tax time

What Quadriga investors have to think about for tax time

It’s hard to oversell the current drama surrounding QuadrigaCX, Canada’s largest cryptocurrency exchange. The reported death of its founder and chief executive Gerald Cotton on December 9, 2018, was accompanied by the revelation that he was  apparently the sole holder of the passwords and access codes to the “cold wallets” that held much of the company’s cryptocurrency.

“[I]t is very possible that the cryptocurrency will be irretrievable and the company may be forced into bankruptcy,” noted tax lawyer David Rotfleisch in a new commentary. “Beyond the obvious problem of losing their invested cryptocurrency, investors should also be cognizant of the tax implications of this event for them.”

According to Rotfleisch, if QuadrigaCX becomes insolvent and unable to pay back its investors, it will result in a tax loss that the investors can use to offset some of their taxable income for 2018 or 2019. The challenge, however, is to determine the timing of the loss and what type of loss can be claimed.

In general, he explained an individual that purchases cryptocurrencies on an exchange don’t get a specific piece or lot of cryptocurrency; rather, they buy an entitlement to withdraw units of a given cryptocurrency, like Bitcoin, from the exchange’s corporate cryptocurrency wallet.

“In a sense, this would mean that any cryptocurrency an exchange is unable to pay back could be considered a bad debt,” Rotfleisch said. He added that the loss can be claimed in the year that the creditor determines it to be a bad debt, following seven factors listed by the Federal Court of Appeal:

  • The history and age of the debt;
  • The debtor’s financial position;
  • Changes in total sales of the debtor in contrast to prior years;
  • The debtor's cash, accounts receivable and other current assets;
  • The debtor's accounts payable and other current liabilities;
  • The general business conditions of the country, the community of the debtor, and the debtor's line of business; and
  • The past experience of the taxpayer in writing off bad debts

Given the woes plaguing QuadrigaCX — the demise of its CEO, the high likelihood that its wallets are permanently inaccessible, the massive debt the company has, and its lack of continuing business — an investor can reasonably write off his investment with the exchange as a bad debt for 2019 or possibly 2018.

In terms of the type of loss, Rottfleisch said investors can elect to apply s.50(1) of the Income Tax Act, which would deem that the debt was disposed of for proceeds equal to nil and then reacquired immediately at the end of the year at a cost of nil. This effectively results in a capital loss equal to the adjusted cost basis, also known as the book value, of the debt.

“On the other hand, if a taxpayer is running a cryptocurrency trading business, the loss may be characterized as a non-capital loss,” he continued. In such a case, the taxpayer’s cryptocurrency would be considered inventory rather than capital property, allowing them to use the non-capital loss to offset other business or employment income.

“[D]ollar of loss for dollar of loss, the non-capital loss would save the taxpayer twice as much tax as the capital loss … and is not restricted to offsetting capital gains,” he said.

Rotfleisch clarified that this all depends on how QuadrigaCX actually conducted business, and whether one’s cryptocurrency trading activities can be properly considered as an investment or a business. The best course of action, as in many complex cases of taxation, is to consult a qualified tax law professional.


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